Singapore officials were justifiably proud last September when Germany's
powerful Siemens AG chose their island-nation as the site for the company's
first board meeting outside the European country in 147 years. It was a triumphant
moment for Southeast Asia's emerging financial center, which presumed that
Siemens' presence only served to confirm Singapore's rapid ascension up the
global economic ladder.

But Singaporean smiles melted when Siemens announced where its next wave
of deutsche marks was headed -- $ 1 billion worth each to China and India,
$ 1.5 billion worth to the rest of Asia. Only a relatively puny $ 215 million
was earmarked for

Singapore. Suggested Prime Minister Goh Chok Tong: Perhaps Siemens could
at least base a regional headquarters in the Lion City. Sorry, said the Germans,
explaining that Beijing -- not Singapore -- is where the most promising market
exists. Goh recalls his conversation with Siemens CEO Heinrich von Pierer:
"His comments sent a chill down my spine."

The darling of foreign investors for much of the past two decades, Singapore
has exceeded all expectations since it became an independent republic in
1965. One of the early East Asian tigers, Singapore unshackled its people
from the yoke of poverty and handed them the ninth-highest per capita income
in the world. That heady growth was largely fueled by the manufacturing sector,
which now accounts for about one-fourth of the island's economy. Last year
manufacturing output grew 13 percent and new manufacturing investment commitments
reached nearly $ 4.1 billion, up from $ 2.8 billion in 1993. Manufacturing
productivity grew 5.8 percent annually between 1990 and 1993, significantly
above Singapore's national productivity-growth average of 3.6 percent.

But just as Singapore closes in on a Swiss-style standard of living, it is
experiencing the growing pains of prosperity -- rising costs and wages and
a strengthening currency. With China, Indonesia, India and others offering
cheaper labor, larger markets and reduced tariffs, manufacturers are thinking
twice about staying in clean-but-costly Singapore. The city-state's next
challenge will be to evolve from an export-driven, investment-attracting
country to a mature economy with a well-paid labor force. Singapore's planners
boldly hope to create an "intelligent island" less reliant on low-wage manufacturing.
Getting within striking distance of such lofty goals wasn't easy. To achieve
its rapid growth, Singapore has for years placed its trust in multinational
corporations (MNCs) and large, state-owned enterprises (called government-linked
companies or GLCs). One consequence was that local entrepreneurship wasn't
encouraged to flourish, prompting onetime Nominated Member of Parliament
Chia Shi Teck to dub Singaporean companies PLCs (poor local companies). With
a policy framework fine-tuned to the needs of multinationals, Singapore has
remained beholden to them to set the pace of change and must continue creating
policies to suit their needs. It is no surprise that the international advisory
council set up by Singapore's Economic Development Board (EDB) includes top
executives from behemoths like Siemens, Hitachi Ltd. and Matsushita Electric
Industrial Co.

While pledging allegiance to MNC-driven policies, Singapore is warily eyeing
the competition. Deputy Prime Minister Lee Hsien Loong said in a 1994 speech:
"Our economy does not yet have the depth, breadth and maturity (of advanced
economies), whether in terms of educated manpower, technological know-how
or well-established MNCs. This formidable competition means that it is entirely
possible for us to fall behind and lose our edge over others."

The competition is already taking its toll: Last year more than 9,400 Singaporeans
lost their jobs in layoffs by the likes of American Telephone & Telegraph
Corp. (AT&T), Thomson Consumer Electronics Inc., Mitsubishi Corp. and
Sanyo Electric Co. Dramatic blows fell during the pre-Christmas cutbacks
at AT&T's cordless- telephone plant, where 600 people lost their jobs.
While AT&T retains a decision-making group in Singapore, it has shifted
its cordless-phone manufacturing to plants on the nearby island of Batam,
Indonesia, and to outfits in China, Malaysia and Thailand.

U.S.-based Black & Decker Corp. laid off 600 workers last June and plans
to cut more jobs in 1995. Japan's Mitsubishi Electronics Manufacturing (Singapore)
halved its staff to 250 by moving its car-audio-products division across
the Causeway to Johor Baru. Another U.S. company, the onetime market-leading
disk-drive maker Conner Peripherals Pte. Ltd., has frozen production levels
in Singapore while shifting more of its manufacturing to Penang and Shenzhen,
China. France's Thomson Consumer Electronics Asia Pte. Ltd. closed Singapore's
oldest color-television plant last year, sacking 900 people, in favor of
cheaper production on Batam and in Bangkok.

The reasons are clear. A Singapore worker earns nine times more than his
Thai counterpart and about five times more than a Malaysian worker in Penang,
which has gone from underdog to worthy competitor. Mokhtar Haniff, general
manager of Penang Development Corp., says many of his state's recent investments
come from companies that rejected bids from Singapore. Digital Equipment
Corp., Hewlett-Packard Co., Motorola Inc., Komag Inc., Intel Corp., Seagate
Technology International Pte. Ltd. and Conner Peripherals have invested in
Penang's booming electronics sector. In 1994 alone, Penang attracted electronics
investments of about $ 576 million, creating 92,000 jobs in 144 new plants.

Prime Minister Goh compares the opening up of China, Indonesia and India
to "switching on three powerful and gigantic vacuum cleaners at the same
time, which suck in low- and semi-skilled manufacturing industries from established
centers." Three decades ago Singapore was the one luring low-level jobs from
developed countries. Now, its best hope may be in managing the transfer to
lower-cost locations. Witness Singapore's role in creating industrial parks
in Batam, Bangalore and China's Suzhou and Wuxi. Singapore-based multinationals
accustomed to local-style management are often the first to sign up for the
new Singapore-managed parks. Ultimately, it won't be just assembly plants
that leave Singapore; as in Japan, component makers, subcontractors and other
support activities are likely to join the exodus. So far, only a buoyant
economy has masked this "hollowing out" of the manufacturing sector.

Exacerbating the situation is the appreciation of the Singapore dollar. Koh
Boon Hwee, executive chairman of trading company Wuthelam Group, says: "In
this environment multinationals may not disengage, but will not engage further."
Companies are already hurting: Singapore Aerospace Ltd. saw its earnings
drop by one-fifth in 1994 partly because of the 9 percent appreciation in
the value of the Singapore dollar in relation to the U.S. dollar.

But Singapore's pragmatic bureaucrats aren't reaching for the panic button
yet. EDB Chairman Philip Yeo says the country's competitive edge must lie
in its capabilities -- such as a first-class infrastructure and a talented
work force -- rather than costs. "We obviously cannot compete as a low-cost
center, because we have a higher standard of living," says Yeo. "Our aim
is to produce more with fewer and better-skilled people."

That's happening all over Singapore, which despite the recentexodus still
makes two of every five computer disk drives in the world. Tech Semiconductor
Singapore Pte. Ltd. will soon be churning out memory chips, while Compaq
Computer Corp. makes a large proportion of its global output of notebook
computers there. And although it's a non oil-producing country, several oil
majors refine and manufacture petrochemicals there to meet the burgeoning
demand for downstream products. In fact, Singapore is reclaiming land to
merge seven existing islands at a cost of $ 5 billion to provide a huge new
area for petrochemical users (see box, page 52).

Singapore's reputation as an excellent middleman, a provider of efficient
telecommunication links and sea and airport services is well-deserved. But
the government does not want to lose its focus on manufacturing. Yeo Cheow
Tong, the minister of trade and industry, says the government's M2000 manufacturing
plan aims to maintain the sector's 25 percent share of gross domestic product
(GDP) and more than 20 percent share of employment. Like other Singapore
planners, Yeo adheres to Harvard economics Professor Michael Porter's world
view on competitiveness, which calls for the development of industry clusters.
The idea envisions companies linked by vertical relationships (such as buyers
and sellers) or horizontal connections (such as those with common customers
or distribution) being grouped together. "An industry cluster can attract
more investments and resources because of its competitive advantages, like
economies of scale," says Yeo.

Strategies like these sound like guarantees of success to businesspeople,
but not to S. Tay, 39, a Sanyo Electronics worker who joined the company
at 18 and was among 89 people laid off last year. She told The Straits Times:
"It doesn't seem fair that I got retrenched. I mean, I've been working for
the company for 21 years. They should have transferred me to another department."
Singapore will have to address this human dilemma.

Minister Without Portfolio Lim Boon Heng says hiking salaries is no answer.
"The unskilled are plentiful, and wages are pulled down by countries with
plenty of cheap labor," he wrote in a trade-union newsletter. "But we cannot
solve the lower-income earners' problems by negotiating for higher wages
for them." Lim warned that raising wages faster than productivity growth
would make Singapore uncompetitive.

Yet in many of Singapore's labor-intensive industries, that is already happening.
The Department of Statistics has found that average monthly wages rose by
8.8 percent last year, up from 6.3 percent in 1993, while real-wage growth
surged 5.2 percent, compared with 2.4 percent the previous year. Rent is
also rising. Industrial property in Singapore is now 186 percent more costly
than in Malaysia, 173 percent more than in Thailand and 757 percent more
than in China.

Nonetheless, Singapore has continued to attract significant new investments
in manufacturing. By planning ahead of demand and creating additional capacity
(such as a second airport terminal), the bureaucrats hope that Singapore's
infrastructure will be better than anything competitors can offer. Says David
Rawcliffe, marketing director of Quantum Asia-Pacific Pte. Ltd., the world's
largest disk-drive maker: "If you are in a business where labor cost is important
to you, then Singapore is not the place for you. But its overall package
is unbeatable."

Singapore was able to absorb the early 1990s recession shock from the West
because it was making products that downsizing Western companies wanted:
disk drives and personal computers. Says Sanjoy Chowdhury, chief Asia-Pacific
economist at Merrill Lynch & Co. in Singapore: "When companies abroad
lay off middle management, they replace one layer of people with powerful
PCs. Those PCs can't function without disk drives. And Singapore is making
just that product." The city-state's disk-drive industry will account for
46 percent of world output in 1995, estimates the EDB. Its disk-drive sector
supports 25,000 jobs, or 1.5 percent of employment in Singapore, yet it contributes
10.7 percent of the island's GDP.

Seagate Technology, which broke ground last month on a new $ 143 million
plant in Singapore, makes about 80 percent of its disk drives there, while
Micropolis Corp., Maxtor Peripherals Pte. Ltd. and Western Digital (Singapore)
Pte. Ltd. operate their sole plants in the city-state. Conner Peripherals
is not expected to expand. Instead, it is increasing output in Penang as
it maneuvers out of a difficult period. But its place will be taken by Matsushita-
Kotobuki Electronics Industries Ltd., which has set up a $ 30 million plant
in Singapore to supply Quantum.

Fortunately for its workers, Singapore is not a one-product economy, even
though the disk-drive industry remains the largest manufacturing employer.
Compaq Corp., for example, is certainly appreciated. Last April Compaq, which
employs more than 3,000 in Singapore, doubled its capacity there and shifted
its entire production of notebook computers to Singapore. (Later it shifted
part of it back to a Houston plant.)

At its Yishun plant in northern Singapore, Compaq runs a state-of-the-art
manufacturing operation. Marketing Services Director Ian Churton says Singapore
is ideal for Compaq's lean organization, which keeps inventories down. "Other
places may have a nice airport or an underused port," he says, "but in Singapore
I'm sure that when my truck leaves my plant it will be at the airport in
45 minutes and the cargo will be on board within an hour of that. Elsewhere
I'm not so sure." Last year Compaq Asia, the Singapore-based arm of the $
11 billion giant, shipped more than 1 million PCs worldwide. Compaq has a
10-20 rule: so long as labor doesn't exceed 10 percent of total costs, and
so long as tariffs in the countries to which Singapore exports do not exceed
20 percent, the city-state is an ideal base. Once that equation changes,
Compaq is likely to move elsewhere. It indicated that by opening an assembly
plant in Shenzhen last year.

Companies like Compaq are being counted on to help Singapore's suppliers
develop key technologies, with support from agencies like the EDB, the National
Computer Board and the National Science and Technology Board. For its part,
Compaq is establishing a product-design center for portable computing products.
Industry Minister Yeo said last year: "We have to encourage more local companies
to improve their process technology and to work more closely with the (multinationals)
like Compaq for technology transfers."

Some of the biggest technology transfers are under way in Singapore's semiconductor
industry, which is expected to produce $ 718 million worth of wafers a year
by 1997, or two-and-a-half times the 1993 value. The $ 330 million Tech Semiconductor
plant in Woodlands near the Causeway is Singapore's most sophisticated facility.
It is a joint venture between the EDB, Texas Instruments Inc., Canon Inc.
and Hewlett-Packard. Tech Semiconductor expects to make about 8,000 silicon
wafers -- containing about 4.2 million chips -- a month by the end of 1995.
Singapore now has five wafer-fabrication plants, 18 chip-assembly and packaging
operations and 16 design houses. The semiconductor sector, which generated
a total output valued at $ 5.9 billion in 1994, employs about 16,000 people.

By focusing on such low-labor-input, high-value-added industries, Singapore
may meet that cherished objective of a Geneva-like standard of living some
day. But one critical constraint is the low education level of Singapore's
workers. Another is its aging population (see "The Graying of Asia," Asia,
Inc., December 1994). The average worker over 40 in Singapore has no university
education, is not proficient in English and is untrained. Only one-fourth
of the city-state's work force has studied beyond secondary level, compared
with 80 percent in Japan. Says Koh Juan Kiat, until recently the National
Productivity Board's executive director: "Older workers will reduce potential
output unless it is offset by productivity gain, industrial restructuring
and technological progress."

Currently, some retrenched Singapore workers find such a blow softened by
alternative job-market opportunities within the republic. Singapore's unemployment
rate is just 2.8 percent (around 41,000 people), but tomorrow's figure could
be much higher, with some extreme estimates reaching as high as 500 ,000
out of work in the next decade. Beyond a skills-development fund, which helps
companies train staff, Singapore has no known plans to deal with redundant
workers. Such a lack of strategy could result in social and labor strife,
and Singapore's leaders have begun telling its people to lower their lifestyle
expectations.

The real development dilemma for Singapore is precisely that -- how to convince
citizens that developed-nation status is a constantly shifting target. From
the outside, Singapore is indeed a well-oiled money-spinning machine where
order rules supreme, or else. But the challenges ahead are real and formidable,
and perhaps just around the corner.

june 1995

An Island is Born
But will demand exist for Singapore's new petrochemical base?

Singapore diplomat Kishore Mahbubani often joked at the United Nations that
his tiny country was the most expansionist in the world -- Singapore's land
area has grown by about 10 percent through reclamation in the past 25 years.
But now Singapore is about to do something bigger: link seven outlying islands
with reclaimed land to build a new island, Jurong, to house the republic's
petrochemical sector. The project will greatly expand Singapore's industrial
area, adding 2,000 hectares of prime industrial space to the land-scarce
republic, which will be connected by a $ 240 million land link. Target date
for completion: 2030.

The massive $ 5 billion state-funded project is well past the talking stage.
The contract for the first reclamation has been awarded to a Japanese-led
consortium. The seven islands -- Pesek, Ayer Chawan, Merlimau, Seraya, Ayer
Merbau, Sakra and Pesek Kecil -- already host Singapore Refinery Co., a power
station, an oil-storage facility and an Esso refinery. Du Pont is building
a $ 287 million plastics plant on Sakra and has plans for a $ 114 million
chemical facility. Other potential occupants include Petroleum Corp. of Singapore
and Mobil Oil Corp.

By fostering the growth of a high-value-added, low-labor-intensive industry,
the republic hopes to boost the manufacturing sector without taxing scarce
resources. Output in Singapore's burgeoning petrochemical sector grew a record
20.3 percent last year to slightly more than $ 1.47 billion, up from just
7.4 percent growth two years ago.
Some analysts wonder whether the project is a giant state subsidy for the
petrochemical industry in Singapore, since none of the companies would likely
expand without Singapore's financial support. But Ong Geok Soo, director
of technical services at Jurong Town Corp., denies it: "The Golden Gate Bridge
eased transport in northern California. Was that a subsidy to the industry?
This is an infrastructure project and only the government can take the lead."

But will the demand for petrochemicals be strong enough to justify such an
expansion? With the mushrooming requirement for petrochemical products in
the region's three giants -- China, India and Indonesia -- the need would
seem to be enormous. But all three are themselves making substantial investments
in the petrochemical sector. In India, for example, new refinery investments
should approximately double existing capacity to about 102 million tons by
2000, when annual domestic demand is expected to reach 103 million tons.

Singapore officials are optimistic, however, that the market will vindicate
their investment. Asia-Pacific petrochemical demand is forecast to grow twice
as fast as that of developed countries and to account for 40 percent of world
chemical needs by 2000, from 30 percent at present. "Petrochemical and chemical
industries are growth industries for Singapore and we want to remain ahead
of demand for land for them," Ong says.